Definitions:
Short Sale: Short Sales occur when a seller accepts an offer on their home and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. The primary advantage of a short sale is that a seller typically has more protection against credit score reductions and is typically eligible to purchase a new property more quickly than those experiencing a foreclosure.
Foreclosure: Often referred to as an REO (Real Estate Owned), this status indicates the property is now owned by the lender or bank as a result of a foreclosure.
Short Sale Buyer Disadvantages:
Buyer Delays: One of the most common reasons for short sales not closing is that buyers are not able to wait for the bank to deliberate. It is essential to know prior to placing an offer what stage the short sale is in with the bank in order to limit these frustrations. Consistent and clear communication with a lender can often be critical in the successful closing of a short sale. For this reason, an experienced short sale agent is important for success.
Negotiation Challenges: Short sale listing agents not only need to negotiate with the buyer and lender, but often there is a second mortgage involved. Both companies often have to accept dramatic losses in order for a short sale to close and in some cases the two cannot agree on acceptable conditions. Also, not all banks are created equal when it comes to being prepared for a short sale. Some simply don’t have the personnel available to handle short sales in a reasonable time period. According to state statistics, an average short sale negotiator handles 137.6 cases during a month.
High Risks: Short sales require a level of detail, patience and expertise that many agents are unable to commit. An agent’s expertise is therefore a key factor in whether a short sale will succeed. Consequently, agents hesitate to list short sales or show short sales due to these challenges.
Short Sale Buyer Advantages:
Price: The obvious reason for purchasing short sales (pre-foreclosures) or foreclosed homes is buying at a level below the current market value. The lender will have an appraisal or Broker Price Opinion (BPO) completed to determine the current market value. The bank will then determine what percentage below the current value they are willing to accept.
Less Competition: While other buyers may be focusing on outbidding the competition with foreclosure purchases, a patient short sale buyer may have fewer offers to worry about. The key, however, is whether the short sale is listed with an experienced agent. Due to the logistical challenges and delays of bank negotiations it is vital to have the sale managed by knowledgeable and prepared agent.
Disclosure Protection for Buyers: When buying a foreclosed home, the bank does not provide disclosures on the home. There could be, for example, water drainage issues, mold or roof damage that the buyer may not be informed of. Buyers of short sale properties receive that type of information. This is a distinct advantage to short sale purchasers as opposed to foreclosures.
Condition of Home: A foreclosure has often been vacant for a minimum of 6 months and there can be significant costs involved in preparing the property for move-in condition. With a short sale, there is often less opportunity for vacancy which reduces the start-up costs for buyers.
How to Buy a Short Sale:
Contact a Real Estate Agent: Due to the challenges listed above it is critical to use an agent familiar with the stages and unique requirements of a short sale. An agent should, prior to placing an offer on a property, determine what stage of the process a short sale is in. This will allow you, as the buyer, to assess whether that is a timeline you are able to accommodate.
Make an Offer: With a short sale all offers are provided to the seller’s agent, but all conditions of that offer must be approved by the lender. For example, in a short sale or foreclosure situation, lenders rarely agree to pay for pest certifications, roof inspections or other repairs. That is the responsibility of the buyer. Your agent should be aware of these conditions prior to presenting an offer.
Lender Reviews the Offer: Depending upon the stage of the short sale, a lender may review an offer for weeks or even months without providing a response to the buyer. There are distinct stages that a short sale must proceed through including having an negotiator assigned, ordering a BPO or appraisal, submitting the offer to an investor, etc. This is when the quality of the selling agent is key in order for you to stay appraised of the status of your offer. All progress is dependent upon the lender and this stage can be quite frustrating if parties do not maintain regular communication.
Lender Accepts or Rejects Offer: Prior to this stage it is strongly advised for a buyer to not spend any out of pocket expenses on the home for items such as pest inspections. A lender has the right to reject an offer at any time and buyers should be cautious of committing any finances prior to written confirmation of acceptance. At this point, a typical escrow can proceed based upon the conditions set forth by the lender.